Stock recovering from sell-off earlier in week as investors rush in

MurrayColeman

AlistairBarr

After opening the week by losing more than half its market value in one day, shares of the mortgage-muzzled online broker and bank continued an impressive climb Wednesday.

Shares of E-Trade
ETFC, +0.25%
were up 19% in midday trading. They closed at $5.54 per share, a gain of 10.8%.

That came after a 41% gain the day before.

"The stock's impressive gains reflect a realization by investors that markets overreacted on Monday," said Jon White, president at Beacon Hill Financial in Orlando, Fla.

The independent portfolio manager for financial advisers also pointed to erratic activity in the stock. In the past month through Tuesday, White noted that on average some 37.8 million E-Trade shares were changing hands daily.

Take out this week and that average drops almost 60%, according to an analysis he did early Wednesday.

"Speculation is driving this stock and has been for months now," he said. "It's not the type of stock that even moderately conservative investors want to own right now."

With 423 million shares outstanding, E-Trade's stock volume equated to 125% of the share float. "That's something we don't normally see in a name-brand stock," added White. "Basically, all of the shares in E-Trade have turned over 1.25 times in the past two days."

"Basically, all of the shares in E-Trade have turned over 1.25 times in the past two days."
Jon White, Beacon Hill Financial

Less than an hour into Wednesday's session, E-Trade's volume topped 12% of the company's total share base. By comparison, General Electric Co.
GE, +0.70%
was only trading less than one-tenth of a percent of its outstanding shares, according to White.

"Part of the reason for E-Trade's recent price spike could also be due to rumors that a white knight is on the horizon," he said.

Some investors, White commented, are comparing the situation to that of Countrywide Financial Corp.
CFC, +18.22%
which sold a $2 billion equity stake to Bank of America Corp.
BAC, +0.42%
after being dragged into the mortgage-related mess.

So-called block-trading activity was also strong. Such large trades, typically done by institutional investors at hedge funds and pension funds, swap at least 10,000 shares at a time. On Tuesday, some 710 block trades were made in the stock, said Bruce Zaro, chief technical strategist at Delta Global Advisors in Huntington Beach, Calif.

Within the first hour of Wednesday's session, more than 575 block trades had been made. "[Tuesday's] activity has attracted a lot more attention to this stock," Zaro elaborated. "We're seeing across-the-board interest in E-Trade from individuals to big institutions."

Cash holdings

On Monday, shares of E-Trade closed below what cash valuations would suggest. The company reported some $1.9 billion in cash on hand through the third quarter. With about 423 million shares outstanding, Zaro said that would mean E-Trade has $4.45 per share of cash in hand.

"That's how much their shares are worth if they liquidated the company," he added. "The caveat is how much subprime-mortgage exposure they've got, which might subtract from their overall valuation. But it wouldn't directly impact their cash position."

The result is that "someone could pick them up for basically nothing at this point," according to Zaro. "Their cash value is now less than the value the market's placing on their shares."

"Someone could pick [E-Trade] up for basically nothing at this point."
Bruce Zaro, Delta Global Advisors

He also said that while speculation is high that E-Trade could be a takeout candidate, no solid names are surfacing yet. "They've got to get more of a fix on their mortgage-loan losses before someone would be willing to make a bid," commented Zaro. "But even with the run-up, E-Trade certainly is trading at very attractive valuations right now."

Also fueling rumors are reports that E-Trade Chief Executive Mitch Caplan canceled a scheduled appearance at an financial conference set for Tuesday.

E-Trade has been in on-and-off talks with rival TD Ameritrade
AMTD, +0.19%
for years. Those merger discussions are believed to have run into problems over strategy and management issues.

But several big outside investors have been pushing for a closer relationship between the two. At least one of those, Jana Partners LLC, still had a large stake in Ameritrade through September. At that point, the hedge fund's shares were worth more than $178 million, according to a filing with the Securities and Exchange Commission on Wednesday.

In June, New York-based Jana along with SAC Capital said that they'd bought an 8.4% stake in Ameritrade. The hedge funds at the same time urged the online broker to merge with one of its rivals, such as Charles Schwab Corp.
SCHW, -0.51%See related story.

Since June 5, shares of Ameritrade have slipped roughly 3%.

Shares of E-Trade plunged earlier this week, as the company acknowledged that it faced more subprime-related write-downs and as analysts at Citigroup suggested a possible bankruptcy for the company. See related story.

Just before markets closed on Wednesday, Caplan appeared on CNBC and declared, "We're here to stay, we're strong."

He refused to rule out a takeout or partnership if it would improve the company's long-term prospects.

"We'll resolve it through a partnership or a relationship, whatever it might be," Caplan added.

He also ruled out bankruptcy as a possibility. At the same time, Caplan said that "we don't know the answer. We took the write-down with the best information we had. The market's so volatile, it just depends on what's happening that particular day."

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